A long-term investor is always on the lookout for the ideal time to invest in profitable companies. When this window of opportunity opens up, usually during events like a market correction, you need to quickly build your portfolio. By building your portfolio at this time, you can dodge market volatility while giving you time to reap in the returns of your investments in the long-term.
What is an investment portfolio?
Your investment portfolio is a crucial part of your long-term investment strategy. It’s a curated collection of financial asset classes, mainly your stock investments that collectively reflect your personal investment goals.
Why it’s important to build a solid portfolio
A solid portfolio is a tool that generates long-term profitable returns. It’s a medium through which investors can reap benefits. A solid portfolio helps meet future capital requirements. A strong portfolio is also one that’s diversified which means that your capital is spread across multiple investment categories. By having a stronghold over multiple financial assets, a strong and diversified portfolio will balance out your capital if any one or few of your asset classes aren’t performing.
Steps for creating a profitable portfolio
Build your goals:
Before picking stocks for your profile, it’s important to clearly define your goals and your risk profile. First, define your goals clearly. What are you trying to achieve with your investment? Nurture realistic goals like ‘raising INR 10 Lakhs in the next 2 years’ rather than investing for vague reasons like ‘I want to become the next Jordan Belfort’ or ‘I want to become rich’.
Make healthy investments
Healthy investments include a good collection of high-quality stocks. They need not necessarily be cheap but are guaranteed to perform well. Don’t get tempted to purchase a ton of penny stocks.
Restrict your portfolio to a decent number of stocks
Collect a few high-performing stocks for your portfolio rather than hoarding too many stocks uncontrollably.
Think in the long-term
Choose stocks backed by strong fundamentals and valuations since these will give you good long-term returns. On the other hand, stocks that are guaranteed to give you short-term returns are unsuitable for long-term returns and are hence not a good choice while building your portfolio.
Create a risk profile for yourself
Depending on your age and financial position, determine the amount of risk you are willing to take. For instance, if you are in your late years, you might want to minimise risk. Depending on your risk profile, you can invest in stocks that match your risk appetite.
Choose an investment strategy
Pick either a conservative or an aggressive investment strategy.
This entails investing in safe, large cap stocks. As a conservative investor, you can allocate up to 80% of your investment for large cap, blue chip stocks.
An aggressive strategy entails investing in high-risk, high-return stocks, mainly small and mid-cap stocks. An aggressive investor must invest 20% of their capital in small caps, 30% in midcaps, and 50% in large cap stocks.
A strong portfolio is also one that’s diversified which means that your capital is spread across multiple investment categories.
While creating a portfolio, it is important to follow the egg-basket rule of not allocating your entire capital to one investment category. This is the essence of diversification and the biggest takeaway for retail investors who are building their portfolio for the first time.